Automating Business Payments: Alleviating the Pain of T&E and Procurement Expenses

Ask the finance director from any major multinational or medium-sized company what their number one priority is for 2005 and almost all will say: control indirect costs and get a handle on how, where, and when these costs occur. In fact, 76 per cent of chief financial officers who participated in a 2003 study cited containing indirect costs as their principle objective.¹ Indirect costs, including travel and entertainment (T&E) and procurement expenses (ad hoc company purchases such as office supplies and equipment), are rarely managed as efficiently as they could be by corporations.

T&E and procurement expenses are two of the largest indirect expenses behind payroll, amounting to approximately $14 trillion a year worldwide.² Many companies rely on cash, cheques, and employees’ personal credit cards to pay for T&E and procurement transactions. For finance directors, there is a huge incentive to move employees towards more centralised and controllable payment methods.

Without automated expense reporting and electronic payment systems, it is very difficult for organizations, large or small, to implement T&E and procurement expense policies, and almost impossible to enforce compliance with these policies.

Getting a Handle on Costs

In today’s increasingly automated business environment, it is surprising how few companies understand the exact nature and scale of their T&E and procurement expenses. What companies do realize is that these controllable indirect costs are significant and growing. The average purchasing volume among a group of major corporations was $2.2bn a year, with many companies spending as much as $10bn annually.³ In North America, companies spent $456bn on indirect expenses under $10,000, according to the 2003 Purchasing Card Benchmark Survey by Richard Palmer and Mahendra Gupta of RPMG Research Corp.

The problem is compounded when companies do not implement or enforce corporate expense policies. Consider the dilemma for a medium-sized corporation with 1,500 employees spread across 10 European countries. When employees at the sales office in Vienna need office supplies, the receptionist calls the local office supply store and pays them with a cheque or cash if the transaction is small. For the financial controllers in London, this is the ultimate worst-case scenario. Not only do they not know exactly how much was spent on these supplies, they have no control over the actual items purchased or where the items were purchased.

The same challenges exist for T&E expenses. The majority of companies (54 per cent) use mostly paper-based expense reports, according to the 2004 Corporate Travel Card Benchmark Survey by RPMG Research Corporation. The same survey found that 41 per cent of companies were using electronic expense reporting tools, while 5 per cent replaced expense reports with travel card statements. Companies without a corporate T&E card program in place find it difficult and expensive to reconcile travel expenses. Paper-based expense reporting costs $22 per report, according to RPMG Research Corp. The high cost of manual expense reporting is attributable to the time spent by the business traveller and the finance professional at the back-end. A report by Deloitte & Touche estimates that it takes up to 30 minutes to complete a manual expense report.⁴

In an effort to reduce the cost of processing T&E and procurement spending, many large corporations have implemented custom made solutions linked to their existing enterprise resource planning (ERP) systems. These solutions tend to be huge and unwieldy, costing tens of millions of dollars to implement and millions more to upgrade. Needless to say, small- and medium-size corporations do not have the luxury of developing customized expense reconciliation solutions and therefore fall back on manual processes. Even those large companies with ERP solutions in place have a hard time identifying spending patterns, since transaction data is stored in database silos in different departments making it difficult to share.

Policies Can Do More Harm than Good Without the Support of Technology

Companies aiming to gain control of their T&E and procurement expenses often try to institute policies that govern spending in these areas. For example, a company may enforce procurement policies that require each designated employee to submit a requisition form that has to be approved before an order can be placed. The advantages gained from the increased control are often mitigated by the cost of adhering to this laborious process. A Datamonitor survey found that paper-based procurement transactions cost approximately €77.50, often larger than the goods themselves.

A typical paper-based procurement process can involve as many as nine steps from the decision to purchase goods or services through to the accounts payable department recording the transaction in the general ledger (Fig. 1). The heavy involvement of internal resources contributes to the per-transaction processing cost cited above.

With companies caught between a rock and hard place with regard to corporate expense compliance, it is hardly surprising that many of them have abandoned policies for T&E and procurement expenses.

Figure 1: Manual Procurement Process

The Reason for Policies and Compliance

While policing corporate expense policies is difficult for companies, such policies serve a valuable purpose. The expression “what you don’t know can’t hurt you” does not apply to controllable indirect costs. Companies without any spending policies waste millions of dollars every year because they have no visibility into T&E and procurement expenses. Corporate travel is easy for employees to abuse, from staying in expensive hotels to expensing personal items. On the procurement side, a lack of centralized planning often results in employees unwittingly buying supplies from dozens of vendors, thereby forgoing bulk discounts.

The advantages of corporate expense policies are:

• Employees have a clear understanding of what, where and how much they are authorized to spend.
• Finance professionals can control and predict indirect costs more accurately.
• When combined with automated expense reporting systems and electronic payment, compliance with corporate expense policies reduces inefficiencies and enables companies to negotiate more effectively with suppliers.

Empowering Employees and Automating Payments

Increasingly, companies are turning to corporate T&E and purchasing cards to automate corporate expenses and enable compliance with corporate expense policies. These cards empower employees to make independent buying decisions that are easily controlled and monitored by organizations. Purchasing cards also remove layers of inefficiencies from the T&E and procurement process.

The following example shows the procurement process when a purchasing card is used. The nine steps discussed earlier are reduced to just four (Fig. 2).

Figure 2: Automated Procurement Process

Purchasing cards can be issued to designated employees with preset spending limits. This reduces the need for companies to create requisitions, purchase orders, invoices, and paper cheques. Datamonitor estimates that purchasing card transactions cost €23 to process, a saving of more than €54 compared to manual processing. These savings include efficiencies gained from reducing manual process, cash handling and supplier discounts.

RPMG Research Corp. concludes that purchasing cards result in a 74 per cent reduction in the procurement cycle time, a 57 per cent reduction in the number of petty cash accounts and a 42 per cent reduction in the number of suppliers in the MRO supplier base. The same report found that US companies that use purchasing cards saved $23bn in 2002.

The results for corporate T&E card efficiencies are just as impressive. RPMG Research Corp, in its 2004 Corporate Travel Card Benchmark Study, found that the administrative cost of processing corporate T&E cards, combined with electronic expense reporting, was $12, compared to $22 for a paper-based expense report. The Deloitte & Touche Best Practices study estimates that automated expense reports enabled by corporate T&E cards take two minutes to complete, as opposed to 30 minutes for a paper-based report.

Corporate T&E and purchasing cards from organizations such as Visa allow companies to analyze spending in detail. In many markets today, Visa Corporate and Purchasing card transactions deliver three levels of data. Level 1 contains basic cardholder information, merchant information and total value of transaction; Level 2 includes tax and accounting information, and Level 3 contains line item details, including airline itinerary, hotel folio, and fleet data. By delivering these levels of information, companies now have the ability to monitor compliance with corporate expense policies. When linked with reporting solutions, this information can also identify exceptions to corporate expense policies. Companies can and are using the detailed spending information provided by T&E corporate cards and procurement cards providing valuable data to facilitate negotiating discounts with suppliers. One company surveyed in the Deloitte & Touche Study on T&E Best Practices that issued corporate T&E cards to its employees reduced its $3.5m travel spend by 29 per cent.

Cards Complementing B2B E-commerce

The emergence of the Internet as a viable business-to-business channel complements purchasing cards and corporate T&E cards. ‘E-procurement’ has become a buzzword in large organizations. Large companies can negotiate relationships with vendors to purchase office supplies online. Equally, companies using corporate T&E cards can empower business travellers to purchase airline tickets, book hotel rooms and arrange car rental service using web-based booking tools, such as corporate travel intranets. With international credit card brands already established as the currency of e-commerce, it is logical that corporate T&E and purchasing cards would dovetail with online B2B initiatives. One participant in the Deloitte study on T&E Best Practices reported that it reduced travel agency transaction costs from $45 for telephone-assisted bookings to $15 for web-based reservations.

Compliance and Cards – A Powerful Combination

Implementing corporate (T&E) and purchasing card programs is just one half of the corporate expense solution. Best practice companies create and enforce policies that mandate the use of these cards by their employees. Companies benefit from enforcing compliance with card usage policies by reducing inefficiencies and the costs. The Level 2 and 3 data available in many markets enable companies to create and enforce compliance with T&E and procurement expense policies.

On average, the participating companies in the Deloitte & Touche study that mandated corporate T&E card use enjoyed higher discounts through travel vendors. For air travel, the average discount was 26 per cent, compared to 13 per cent for companies that did not mandate their use. RPMG Research Corp., in its 2004 Corporate Travel Card Benchmark Survey, found that a significantly higher percentage of organizations that use travel card data to negotiate supplier discounts mandate the use of these cards by employees (70 per cent compared to 56 per cent).

The Twin Benefits of Corporate T&E and Purchasing Cards

In conclusion, companies large and small can use corporate T&E and purchasing cards to support and enhance their corporate expense policies. The enriched data available from corporate T&E and purchasing card transaction enables companies to make smarter, more informed business decisions. Meanwhile, real-time, automated access to employee spending information allows these organizations to enforce compliance with spending policies in a way that was difficult, if not impossible, in the paper-based environment.

¹ Source: CFO Research Services.

² Source: Visa International estimates.

³ Purchasing Card Best Practices Guide: Deloitte & Touche, Visa International 2004.

⁴ Travel and Entertainment Best Practices Guide: Deloitte & Touche, Visa International 2004.

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